Indian Banking--Drawing Lessons from U.S.Financial Crisis

The following article of Dr.K.K.Ammannaya was published in Southern Economist dated 15th November 2008.Please refer to page 37 of this issue.

Articles on Individaul Development

Dr.K.K.Ammannaya has written about 75 articles on individaul development and these have appeared in newspapers and journals.His book on individaul development in Kannada is-
''Nayakathva Nirmana''

Performance Plans and Strategies for Indian Banks

The book on planning and strategic planning published by Dr.K.K.Ammannaya is the following-
''Performance Plans and Strategis for Indian Banks''

Central Banking Reform

India has implemented lot of banking reforms.At the time of taking up further reforms in banking and financial sector it is also necessary to examine whether reforms are necessary in the area of cenral banking in India.In India it is now presumed that in RBI everything is perfect.This presumption is not correct.
The RBI has been using the same montary and credit control measures sometimes excessively too.For example the earlier RBI governor went on hiking rates and containing liquidity till he left RBI at the end of October 2008.He in fact committed some sort of excesses in moneatry tightening and successfully moderated growth in many sectors of the economy..These RBI measures told upon growth and perforamnce of all productive sectors.The present economic down turn and alround pessimism that is prevalent are partly due to the excessive monetary tightening by RBI.
RBI must be innovative.It mustinvent new tools and weapons that can be used without affecting all productive sectors alike.RBI has completed 73 years of its existence.At this stage it is necessary to review the working of RBI and also to examine the efficacy of its moneatry policies.An expert committee must be appointed for this purpose.The Union Government and Union Finance Minister must bestow thoughts on this matter.

New Kannada Article

Another new Kannada article titled ''Amerikada Banking Mathu Hanakasu Kshetrada Bikkattu'' has appeared in the decennial issue [issue of November 2008]of Udyamadarshi,Kannada monthly.

Indain Banking--U.S Financail Crisis

Southern Economist dated 15thNovember 2008 contains an article by Dr.K.K.Ammannaya .The title of the article is-
''Indain Banking--Drawing Lessons from U.S.Financial Crisis''

Copying articles

Recently it was reported in a section of the press that a university vice chancellor copied two chapters of his Ph.D thesis from some other thesis and submitted his final thesis for his Ph.D.Copying articles of others and publishing the same in one's name is a crime.I am giving herebelow two instances where my published articles were lifted by some other people and were published in their names.
1.My article titled''Need For Performance Budgetingin Banks''published in Financail express dated October 28,1979 was copied by one Brijendra Swarup Saxena.Mr Saxean copied my said article and published the same in his name in the Jouranl of Indian institute of Bankers,April-June 1980 issue.While publishing he did not use even minimum intelligence.In my article I had mentioned '' Regional Development offices''.Such offices were there only in my bank,i.e Syndicate Bank.In all other banks there wereRegional Offices.Mr.SwarupSaxena did not change even this while publishing the article in his name.Regional Development Managers and Regional Development Offices were peculiar to Syndicate Bank alone at that time.
Mr.C.P.Raghavan ,then Resident Editor of Financail express vide his letter dated 14th February 1981 addressed to Mr.R.D.Pandya editor Journal of the Indian Institute of Bankers stated that copying and publishing of such lifted article of some one else by Saxena in his name was plagiarismof the worst order.The pity is the Journal of Indian Institute of Bankers rejected the same article when I sent it to them for publication in July 1979.After rejection by that journal I got it published in Financail Express.But the same Journal Of Indian Institute of Bankers published same article of mine when Mr Saxean sent it to them after copying it from Financail Express.Here you can see how editors act and howthey yied to influence and publish lifted articles.
2.I published an articletitled''Badathana,Pragathiya daraMathau Udyoga''[Poverty,Growth Rate and Employment]in Kannada in Janavahini,Kannada daily in itsissue dated10th May 2001.This article was copied by J.B.Raju Pathrikeand was published in its issue dated 16th June 2001in editor's name.Again the same article was copied by the editor Udyamadarshi and aws published in its issue of July 2001.[pages 26,27]

Bio Data Of Dr.K.K.Ammannaya

I.Academic Qualifications-
M.Com[Banking],Ph.D[Banking]
First Ph.D in banking[Commerce]From Mangalore University,Mangalore.
Thesis for Ph.D-
''Performance Budgeting and Employee Participation-A Participation Model For Indian Banking Industry''The examiners for the thesis wereDr.P.R.Brahmananda,eminent Indian economist and Prof.Ronlad Hester noted US economist.He did Ph.D in a record period of two years.
IIProfessional-
Worked in MGM College Udupi as lecturer immediately after post graduation.
Joined Syndicate Bank as an officer in 1971.Worked in Syndicate Bank in various capacities for about three decades including in senior management grade positions.Worked in all areas and handled portfolios of planning and development,personnel and HRD,credit,international banking and also operations in branches.In Planning and Development major contributions included installation of performance budgeting system in the bank and preparation of first performance budget of 1974,new deposit scheme called Adarsh Deposit scheme,new deposit camapigns dedicated to specific segments like doctors,teachers,farmer,lawyers,traders,women Man of the Year Awards etc.
In Personnel and HRD area handled implementation of new service regulations [PCR]for officers,decentralisation of personnel functions,formulation of transfer policy and other personnel policies etc.I was editor of PIN,the personnel department newsletter then being published.Also worked in IBA for some time to help IBA in PCR implementation.I was regular participant in personnel committee meetings of south based banks.In Credit Department prepared Handbook of Credit Management,action plans for Zones and regions,in the area of credit,etc
Also served for one full term of five years as Chairman Of Varada Gramina Bank which was incurring huge losses at the time of my joining.Formulated a long range plan and annual action plans for turn around of the bank.Achieved magnificent turn around of the bak and wiped out its accumulated losses.Achieved large amount of netprofit after wiping out all accumulated losses.This was much before government infused extra capital.
Constructed beautiful own head office building for the bank.This is the biggest building in that area with a beautiful conference hall housed in it.
BIRD Lucknow has made a case study of my banking experiments and achievements.Taranga weekly has published a cover feature article about my banking achievents and work in regional rural bank.
Publications.
Published 1249 articles in English and 2289 kannada articles during last 45 years.Also piblished sevearal books both in Kannada and English apart from editing some books.
His article on Marketing In Banking published in Financail Express dated 23 rd July 1973 was one of the first on that subject at that time.His article on Rural Regional Banks on the Horns of a Dilemma published in Fortune India dated16 th July to 31st July 1993recommended sponsorbank wise and state wise merger of RRBs and subsequent mergers were done accordingly.His latest article''Transformation in Indian Banking-Post Reform Developments and Challenges Ahead'' was published in Indian Banker of October 2008.He wrote and published an article onCredit and Growth Strategy In Financail Express on the basis discussions in bank economists conference held in April 1989 at MUmbai.
He was guest faculty in Bank's staff training college for over 15 years.He was guest faculty for MBA at Mangalore university in the initail years of MBAthere.He had training at NIBM Pune,bankers training college of RBI,Bird Lucknow,administrative staff college ,IBA etc.He had occasion to participate in as many as 27 progrmmes during his service.

New Article on Anti Money Laundering Programme for Banks

Dr.K.K.Ammannaya has written a new article titled
"" Anti Money Laundering Programme for Banks and Its Implementation''

INDIAN BANKING – DRAWING LESSONS FROM U S FINANCIAL CRISIS

The Bank of International Settlements (BIS) located at Basel in Switzerland which is the bank for Central Banks of all the countries in the world, has for long warned of the dangers of un-restricted credit expansion and asset price inflation. Its views on the global financial crisis incorporated in its annual report released recently provide lot of insight in to the present global financial crisis. In its report the Bank has stated – “the current, market turmoil on the world’s main financial centres is without a precedent in the post war period...................Along with the resurgent inflation there are fears that the world economy might be at some kind of tipping point”. The BIS report has also made an allusion to the genesis of the crisis. The report has stated “loans of increasingly poor quality have been made and then sold to the gullible and the greedy, the latter often relying on leverage and short term funding to further increase their profits. This alone is a source of vulnerability. Worse the opacity of the process implies that the ultimate location of the exposure is not always evident”.

GENESIS OF THE CRISIS

The BIS report has thus succinctly brought out how and why the crisis has occurred. It is a little over a year since the US Financial crisis became a global concern. Starting with home loan sector American banks and lending institutions lent recklessly to borrowers who were not credit worthy and who had no repayment capacity, based on their income levels. In the U S everything was left to markets without adequate regulation and with utter disregard to accepted banking principles and sound canons of lending and investment. Sub prime lending spurred, acute competition among banks and other lending institutions which resulted in unsafe unprincipled and indiscriminate lending. This type of lending resulted in dilution of lending standards and brought about total degeneration of banking. These sub prime loans were securitised into innovative products and derivatives. Commercial banks and investment banks aggressively invested in such derivatives. The sub prime loan assets were sold far and wide through securitisation.

It was not clear in many cases who was owning them and how much they were worth. Many future transactions in U S had no asset-base. Rating agencies liberally gave good rating to such derivative products. Auditors also did not find fault with banks either for lending to those who had no capacity to repay or for investments in securitised sub prime loans. The BIS has attributed the long period of easy money and lax supervision as being principal reasons for the crisis. Collapse of 158 year old American Investment Bank Lehman Brothers acquisition of Merril Lynch by Bank of America and financial crisis of AIG (American International Group) have shaken, critically shaken the entire financial world. The U S financial crisis has pushed the U S economy to the brink of a recession. The collapse of banking institutions such as Fortis in Europe, Merril Lynch Lehman Brothers & Washington Mutual in U S has compelled the governments to come out with rescue plans. British government has bought shares worth $ 250 billion in British Banks and US government is buying shares worth $ 700 billion in US banks. US Government has also decided to inject capital to two giant housing loan companies Fannie Mac and Freddie Mac. Rescuing troubled financial institutions has thus ceased to be an un-orthodox strategy even in U S Financial analysts opine that adventurous financial engineering has been the main reason for the crisis in the US.

PRUDENT POLICY BASE

As recently stated by our Prime Minister – Dr Manamohan Singh, India is not insulated from the global financial crisis, but Indian economy is not that vulnerable. Indian banks are relatively free from the crisis because of the prudent and judicious policies adopted and implemented by Government of India and RBI. Prudent policy base provided relative immunity to Indian banks from the major adverse effects of global financial crisis.

Dr Singh in his capacity as Finance Minister implemented financial sector and banking reforms in 1990s on the basis of the blue print provided by Narasimham Committee. Narasimham Model was based on adequate capitalisation, sound provisioning norms and effective supervision.

RBI has now started implementation of Basel II also. Indian model did not permit investment banking on the lines of American investment banking model. In India product innovation was on sound lines and the same did not degenerate to the level of innovation that obtained in US. Another important factor was that India did not allow full capital account convertibility of the rupee. If it was done India would have been exposed to much greater adverse impact and contagion from the crisis prevailing in US and Europe. India proceeded with economic and banking reforms not with boldness but with extreme caution. The risks emanating from the global crisis will continue for some time. Although India is relatively free from the major adverse effects of the crisis, India will surely face some adverse effects. India has already started experiencing ripple effects of the global financial melt down. As indicated by Prime Minister, India too is bound to feel the pain.

Indian banking system particularly the main line banking system comprising SBI group and PSU banks have been able to withstand the crisis so far. It is necessary to limit the impact of the crisis by adopting appropriate strategies.

DRAWING LESSONS

Banks in India have to draw and adopt suitable lessons from the US financial crisis. The BIS report has some useful messages for India. The seriousness of US financial crisis can never be down played in India. Capital flows out of US have started seeking safer sanctuaries. Emerging markets including India do not figure high in the list of preferred destinations. Coping with the consequences of the on-going re-pricing risks is one of the challenges in India and other developing countries.

On the basis of the lessons drawn from the US financial crisis Indian banking sector must adopt a suitable survival strategy. The path to survive to-day and continue to survive in the days to come, is to stay focussed on fundamentals. From a fundamental perspective India’s financial system has strength, has resilience and it has lot of going for it. Banks must focus on leveraging their existing strength and consolidate themselves in terms of financial strength, quality of assets profitability and productively, enhancement of value for stakeholders and overall balance sheet strength. Focussing on quality rather than volumes will be an important basis for success in the present scenario. Banks must remember that leaving everything to markets without adequate regulation and without adherence to accepted banking principles and sound canons of lending will only dilute lending standards and banking standards and make them vulnerable to any crisis. Dilution of lending standards will bring about degeneration of banking.

Therefore, it is necessary for banks during these days of global financial crisis is to ensure strict adherence to accepted norms and canons of lending and investment. Utmost professionalism in credit appraisal and loan approvals is of crucial importance from the point of view of avoiding loan defaults and eliminating fresh additions to the list of non-performing loan accounts. Norms relating to security and value thereof, quality of security, margin and LTV (loan to value ratio), income norm, etc must scrupulously adhered to. Retention of higher margin and restricting loan amount to a lesser percentage of the value of security say 60 to 65 per cent as against 70 to 85 per cent allowed earlier will be a prudent approach in the present scenario. Property prices have either started declining or threatening to fall in many major cities in India. Banks have to exercise utmost care while lending against house properties and immovable properties. Loan amounts must be determined based on careful and comprehensive credit appraisal and having regard to the realistic value of the house property or other immovable property.

COMPREHENSIVE FAILURE

The financial crisis in US is the cumulative result of many questionable practices adopted by banks over the years. Aggressive lending to those who were ineligible for credit based on income norms and repayment capacity securitisation of such loans by way of new products and derivatives and reckless investment in such derivatives by banks failure of auditors to unearth and report the failure of banks to adhere to credit norms and default in repayments by borrowers failure of rating agencies to rate newly innovated products and derivatives correctly and assignment by them of excellent ratings to all such products, etc brought about a comprehensive failure of governance in banks in USA. Banks in India should draw a lesson from this and ensure good governance at all times. Banking is dealing in others money and utmost care and professionalism must be shown in this business. Recently while addressing the north-eastern states banking summit at New Delhi, the Finance Minister – Sri P Chidambaram has stressed the need for banks to function as banks. He stressed the importance of adhering to best banking practices and prudent lending norms.

Professionalism in lending must be given primacy and it has to be ensured that there is no dilution in lending standards.

The traditional canons of lending and investment viz liquidity, safety and profitability hold good even to-day particularly in the context of convulsive developments in the US financial sector. Liquidity through inflow of funds by way of payment of interest and repayment of instalments by borrowers can be ensured by lending only to those who are creditworthy and who can repay the loans. Safety of loans can be ensured by taking adequate security with required margin along with easily realisable collaterals and with other safeguards. Profitability can be ensured by giving quality loans. Banks must put in place an effective follow up mechanism to ensure that loans given continue to be performing standard assets. Also, in the process of lending adequate net interest margin must be ensured through proper and prudent pricing. In the present scenario, it is necessary to adhere to these canons of lending and investment.


In India, credit card defaults and defaults in personal loans may become problem areas in the days to come if adequate care is not taken now. Utmost care must be taken while issuing cards and banks must strictly adhere to the norms and guidelines in this regard. It must be ensured that credit cards are issued only to those who are eligible and who have capacity to honour their commitments under credit card. Banks should also step up their level of disclosures on their credit cards, personal loans, etc.

The financial sector especially, being at the centre of the storm is grappling with plenty of uncertainties. In the US inter-bank lines of credit have all ceased to exist as banks are wary of lending to one another.

SAVING CAPITAL

The stock market crash has made it almost impossible for banks to enter the market for mobilising additional equity at present for meeting the capital adequacy requirement under Basel II. As panic has over taken analytical thinking there are only sellers in the market at present. In this scenario, it will be difficult for banks to come out with IPOs or follow on issues to augment their equity levels. Banks must in the present scenario focus on increasing their capital efficiency. By restricting their lending to borrowers having lower risk weights banks can have lot of saving in capital. Thus, by saving capital to the maximum extent in each lending banks can achieve substantial savings in capital.

Under the Basel II framework, banks will need to provide capital based on the risk associated with their loan port-folios. If a bank has high quality credit exposures, it will save capital on account of lower credit risk. Conversely a bank with relatively lower rated credit exposures will need to provide more capital. Additionally banks will have to provide incremental capital for market risk and operational risk. Capital for operational risk was not part of the previous regulatory framework.

In view of the difficulty in raising fresh capital from the market through public issues and also in view of the fact that government cannot go on infusing capital as and when required banks must spare no efforts in saving capital in the process of their lendings and credit allocations. Thus, ensuring capital efficiency is a vital requirement in managing banks in present turbulent times.

ACCENT ON RECOVERIES

In US even smaller banks and regional lenders which have been suffering from the housing slump are now getting hit by raising loan delinquencies as the economic down turn deepens. The 19 number standard and poor’s 500 Banks index has lost half its value in the past year. The US is now preparing to take stakes in a number of regional banks in order to revive lines of credit to businesses and households. Drawing a lesson from this, banks in India must keep a close watch on all loan accounts and see that no standard asset slips to the category of sub standard assets. Simultaneously efforts at recovery of arrears in existing non-performing loans must be intensified and maximum number of sub-standard accounts must be upgraded as standard assets.
One time settlements and closure of non-performing accounts, rephasement of instalments and reschedulement of accounts etc can also be tried wherever possible. Banks must also make use of the SARFAESI Act wherever possible to accelerate recoveries and closure of NPA accounts. Speedy recycling of funds through recoveries and closure of NPA accounts must be given primacy by all banks. This will help in two ways. Speedier recycling of funds through recoveries will help increase liquidity. Recovery and closure of non-performing loans will significantly contribute to the increase in profitability of banks.

The US economic slow down will cause a deceleration in world economic growth, a factor already noted by the world bank IMF and other global institutions. To-day we observe all round irrational pessimism as against the irrational optimism that existed earlier. This pessimism may bring about reduction in the economic activities. It may take lot of time for global investors to come back to India to invest. Foreign institutional investors have always been net settlers in Indian stock markets for the last several months. Having regard to these developments banks must adopt a cautious approach and restrict their lendings only to those who have strong repayment capacity. It is better to make use of credit information available with CIBIL in the case of every loan applicant and applicants having poor credit scores as per CIBIL data must be avoided. Only applicants having satisfactory credit habits and good track record of repayment may be sanctioned loans.

Banks must also religiously adhere to exposure limits prescribed for loans and investments. Capital market exposure must also be restricted to the minimum level. Banks must adopt enhanced appraisal for issue of fresh credit cards. There are individuals who have five to six cards each issued by different banks. Because of too many credit cards, many of such card holders are not in a position to monitor their dues under different credit cards and make payments. Banks may do well not to issue credit cards to those who possess two or more cards issued by other banks. By means of issuing credit cards to the individuals already having two or more cards banks will be promoting financial indiscipline and dilution of credit standards. This must be avoided. The RBI Governor D Subba Rao has allayed fears of a recession in India and maintained that growth story would continue despite slight-deceleration. He has pegged GDP growth for FY09 at 7.5 to 8 per cent.

STRESS ON PROFESSIONALISM

According to RBI Governor as India’s growth was mainly driven by domestic demand and consumption, the country would be less affected by global financial turmoil but it would not go completely unscathed. RBI has adopted a cautious credit policy. Banks will do well to adopt a cautionary stance in credit expansion, restricting credit only to the credit worthy . Utmost professionalism must guide their credit decisions and approach in the matter of credit expansion.

It is learnt that adventurous financial engineering and product innovation accelerated the financial crisis in US Indian banks have so far adopted a prudent approach to product innovation. In India product innovation has been on sound lines and earlier innovations did not degenerate to the level of innovation that obtained in US Indian banks must continue their present approach to product innovation. Adventurous financial engineering must be avoided at all times.
AUDIT & INSPECTION

Another issue requiring utmost attention in the present scenario is audit and inspection. Banks to-day find it difficult to maintain the minimum required controls expected of them in a new complex and increasingly regulated business environment. The traditional audit and inspection provide assurance that control systems are adequate and function satisfactorily. But, audit and inspection are in fact a post-mortem and findings emerging there from are only after days and months after the transactions are over. Moreover audit and inspection fail to cover all transactions to the extent of 100 per cent. It is possible that audit and inspections may skip several transactions. Many of such skipped transactions may be irregular ones and some among them may be transactions causing financial loss to banks. Audit and inspections are rarely able to check all transactions in a detailed manner for controls compliance. Therefore, there is risk of even frauds remaining undetected. To assist in the efficient capture and evaluation of data sophisticated software tools need to be adopted and used for evaluation of disclosure controls and procedures and internal controls and supervision over financial reporting. It is also necessary to increase the frequency of inspection to ensure that only fewer transactions that have taken place during the immediately preceding period are pending to be checked. This will facilitate checking of majority of transactions and the chances of several transactions going unchecked and unnoticed can be eliminated.

DEPOSIT MOBILISATION

The Prime Minister – Dr Manamohan Singh’s recent assurance on the safety of bank deposit in India will go a long way in helping banks in the task of deposit mobilisation. Banks must make sincere and serious efforts to mobilise smaller deposits of the public to increase liquidity. The on-going efforts at financial inclusion and opening of new accounts including no-frills accounts must be converted as new opportunities for canvassing small retail deposits. Smaller retail deposits will lend more stability to the deposit portfolios of banks and withdrawals if any of such small deposits will not cause any sudden fluctuations in the deposit position of banks. Banks must as a matter of strategy, focus on small deposits in the present scenario.

High cost bulk deposits must be avoided as far as possible and small deposits of individual customers must be preferred to such bulk deposits. Present global financial crisis may not have much adverse impact on small and micro enterprises. It is better for banks to focus on micro finance. Micro finance is nothing but small financial assistance provided to small entrepreneurs for undertaking productive activities. Micro credit has potential to become an effective instrument for alleviation of poverty.


GOOD GOVERNANCE

A vital requirement during periods of financial crisis like this is to focus on good corporate governance. The corporate governance philosophy of banks has to be based on pursuit of sound business ethics and strong professionalism that aligns the interests of all stake holders and the society at large. Strengthening of public confidence in banks is a vital requirement. Disclosure of reliable information facilitates market discipline strengthens confidence and reduces chances for rumors and creation of an atmosphere of suspicion and misleading information that may bring about market instability. Banks must give primacy to enhanced corporate governance in crisis periods like this and creation and enhancement of value for stake-holders should be an area of focus in corporate governance.

All banking challenges in a period of crisis like this can be met resolutely and with confidence only if all the branch managers, officers and staff in banks join hands in the task. Therefore, what is most essential is full involvement and participation of the entire personnel in all bank functions particularly in mobilisation of deposits, recovery of arrears in respect of all irregular loan accounts and up-gradation of loan accounts from sub-standard to standard categories and closure of bad loans and non-performing loan accounts. Ensuring optimum performance by each branch manager, officer and staff member will be crucial in this period of trial.

Thus, Indian banks can surely withstand the adverse effects of global financial crisis and survive on an enduring basis if they draw appropriate lessons from the US financial crisis and adopt suitable strategies in the light thereof. Staying focussed to fundamentals, adoption of utmost professionalism and conformity to prescribed norms of lending and investment and adherence to sound banking principles and ensuring optimum capital efficiency are vital for success and continued survival of banks.

Bankers On Banking

Bankers On Banking,edited by Dr.K.K.Ammannaya
Publishers--Dr.T.M.A.Pai Foundation,Manipal,Udupi-576104
This book contains the speeches delivered by recipients of K.K.Pai National Banking Award .So far five eminent bankers have recived this coveted award.
Part II of the book contains the profiles of K.K.Pai National Banking Award winners.Dr.K.K.Ammannaya is the author of the profiles.
Sri K.K.Pai banking veteran of all India stature and noted educationist and present Registrar of Academy of General Education,and President of Dr.T.M.A.Pai Foundation has written foreword to this book.

Rate Cut By RBI

In a major move aimed at injecting additional liquidity of about Rs.85000 crores RBI on 1st November 2008 cut CRR by one percent.RBI has also slashed Repo rate by 0.50 percent apart from reducing SLR by 1 percent.These measures are most welcome as the same will go someway in bringing about some optimism in the economy as aginst the irrational pessimism that was created by the earlier RBI governor by hiking rates and by creating liquidity constraints.
I had clearly stated in my letter to editor in Business Line dated 11th August 2008 that RBI was indeed committing some sort of excesses in monetary tightening by means of repeated rate hikes and CRR hikes.I had pleaded for stopping further rate hikes in my letters.But RBI went on hiking rates and increasing CRR.After every hike in rate and after every increase in CRR there was alarming increase in inflation rate.RBI must have noticed this then and there and stopped further rate hikes.But RBI did not do so.It increased rates further and hiked CRR again.Now the new RBI governor had to take these correctional measures to save the economy from decline and to help the growth process.
In India galloping inflation was not on account of excess liquidity and excess demand as perceived by RBI.It was because of supply constraints and global factors including galloping crude oil prices.I ma happy that at least now RBI has taken these correctional steps.
RBI must cut repo rate by one percent again by the end of December 2008.Similarly CRR must be cut by one percent by December end.RBI must adhere to the reform target of reducing CRR to 3 percent and ensure that CRR is reduced to 3 percent within one year from now.What we need in India is a cheap money policy in a situation like this and not the dear money policy adopted by DR Y.V.Reddy earlier RBI governor.The present measures of RBI will surely go sme way in creating optimism in the economy and also in spurring growth and growth and expansion efforts.

EMERGING ISSUES IN BANKING SECTOR -CHALLENGES AHEAD

(Address at UGC sponsored State Level Seminar
held on 22.10.2008 at Chamarajanagar)

I am extremely happy to be in your midst this morning as a participant in the UGC sponsored State Level Seminar on “Emerging Issues in Banking Sector – Challenges Ahead”. The theme chosen has lot of relevance & importance to-day, particularly in the context of the global financial melt down and the convulsive developments in the US financial sector & also in the financial sector in Europe. The sub themes viz consolidation of banks, product and activity diversification & micro finance are also of supreme importance and are fundamental for banking success. I hope the deliberations on these themes will unfold lot of new ideas that may form inputs in future strategic planning. It is important to remember that we have assembled here to deliberate on these vital issues at a time when financial sectors in US & Europe are in the midst of a crisis. The financial crisis in US & Europe are bound to take the discussions to the crisis proper and crisis related issues – issue of management of banks during crisis & slow down periods, issue of conformity – conformity to time tested canons of lending & investment issue of adherence to sound banking principles and best banking practices. The most important issues that have now emerged are the issues of credit operations in a manner conforming to prescribed norms and sound canons of lending and investment, the issue professionalism & the issue of regulation and governance.

Collapse of 158 year old American Investment Bank, Lehman Brothers, acquisition of Merril Lynch by Bank of America & financial Crisis of AIG (American International Group) have shaken, critically shaken the entire financial world. India is presently having relative freedom from the panic and crisis that followed the collapse of banking institutions such as, Fortis in Europe, Merril Lynch Lehman Bros & Washington Mutual in US. British Government has brought shares worth $ 250 billion in British banks & US Government in buying shares worth $ 700 billion in US banks.

PRUDENT POLICY BASE

As recently stated by our Prime Minister – Dr Manamohan Singh, India too is not insulated but Indian economy is not that vulnerable. Indian banks are relatively free from the crisis because of the prudent & judicious policies adopted by RBI & Government of India. Prudent Policy-base has been a great strength for Indian banking.

Dr Singh implemented banking reforms in 1990s on the basis of the blue print provided by Narasimham Committee. Narasimham model was based on adequate capitalisation, sound provisioning norms & effective supervision. RBI has started implementing Basel II too Indian model did not permit investment banking on the lines of American investment banking model. In India, product innovation was also on sound lines and the same did not degenerate to the level of innovation that obtained in US. Also, India did not allow full capital account convertibility. If it was done India would have been exposed to much greater adverse impact & contagion from the current crisis in US and Europe. India proceeded with economic and banking reforms not with boldness but with extreme caution. All the same, some impact is inevitable and some adverse impact is bound to be there on India in this globalised environment. India has started experiencing ripple effects of global financial melt down.


SURVIVAL STRATEGY

Indian banking system, particularly the main line banking system comprising SBI group and PSU banks have withstood the crisis so far and they are sure withstand the crisis in the days to come. The way to survive and also to continue to survive is to stay focussed on the fundamentals. From a fundamental perspective India’s financial system has strength has resilience and it has lot of going for it. To-day, what is Worrisome is the al-round irrational pessimism as against the irrational optimism that prevailed earlier. Once this gets evaporated global investors will come back to India to invest and earn in view of the soundness and robustness of the system. However, banks in India have to draw and adopt suitable lessons from the US financial crisis. Leaving everything to markets without adequate regulation with utter disregard to accepted banking principles and sound canons of lending will only dilute lending standards and banking standards and bring about degeneration of banking. This is what has happened in US Sub-prime lending i.e. giving credit to those who are not credit worthy spurred acute competition in US among banks and financial institutions which resulted in unsafe, un-principled and indiscriminate lending. These sub-prime loans were securitised into innovative products and derivatives commercial banks and investment banks aggressively invested in such derivates. Many futures transactions in US had no asset banking or asset base. Rating agencies liberally gave good rating to such products and auditors too did not find fault with banks either for sub-prime lending or for investments in the derivatives having base in such sub-prime loans while we can be proud of ourselves for escaping the full Trauma of Newyork, London & Berlin, we must always remember to adhere to the sound canons of lending and investment and best banking practices. Utmost professionalism is vital in banking as we use money of others in the business.

REMARKABLE TRANSFORMATION

Indian banking has seen a thorough change total change a remarkable transformation in post-reform era. Shift of emphasis to risk based management acute competition as between banks for amassing business, change in efficiency parameters, product diversification, clear trend towards universal banking, accent on consolidation, IT initiatives including CBS, shift of focus to concerns from size related issues, new HRD initiatives etc are the changes that we have been observing in post-reform era.

The reform measures implemented on the basis of recommendations of Narasimhan Committee included progressive reduction of statutory liquidity ratio and cash reserve ratio, prescription of uniform accounting norms with regard to classification of assets recognition of income and provisioning enactment of an Act of Parliament providing for setting up of tribunals for expeditious adjudication and recovery of bank loans establishment of separate board for financial supervision of banks, permission for the entry of new private banks to inject an element of competition between public and private sector banks rationalization and deregulation of interest rates, enactment of SARFAESI Act implementation of capital adequacy norms and re-capitalisation of banks, revision of balance sheet format to ensure increased transparency, permission to banks to access capital market for mobilizing additional equity, introduction of Prime Lending Rate (PLR), New branch licensing and New bank licensing policy, banking ombudsman scheme, etc.

Classification of Reforms:

Reform measures can be classified into six categories namely a) measures meant for promotion of competition (b) measures meant for strengthening role of the market (c) prudential measures (d) legal measures (e) measures meant for strengthening supervision or supervisory measures and (f) measures relating technology. Some of the reform measures were meant for strengthening of competition. They included grant of some operational autonomy to public sector banks, reduction of government stake to 51 per cent of the total equity and permission to mobilize equity to the extent of 49 per cent from the market, adoption of transparent norms for the entry of private sector, foreign and joint venture banks, permission for foreign investment in the financial sector in the form of FDI as well as port-folio investment, permission to public sector banks to diversify product port-folio and business activities, road map for presence of foreign banks and guidelines for mergers and amalgamation of private sector banks and NBFCs with banks, issue of guidelines on ownership and governance in private sector banks, etc. Reform measures initiated to strengthen the role of market forces included progressive reduction in SLR and CRR, market determined pricing of government securities, deregulation of interest rates with a few exceptions and increased transparency and disclosure standards to facilitate market discipline introduction of pure call money market, auction based repo-reverse repos for short term liquidity requirement, introduction of improved payment and settlement systems, etc. Prudential measures which have been implemented, covered, fulfillment of capital adequacy norms, new accounting, income recognition, provisioning and exposure norms. Measures initiated to strengthen risk management included assignment of risk weights to different categories of assets, norms on connected lending, credit concentration norms, application of market-to-market principle for investment port-folio and fixation of limits for deployment of funds in sensitive sectors and activities.

In addition, KYC guidelines, anti-money laundering standards, introduction of capital charge for market risk, higher graded provisioning for NPAs etc were adopted for implementation. Institutional and legal measures introduced by way of supportives to banks to improve their performance in the area of recovery and asset quality up-gradation included setting up of Lok Adalats, debt recovery tribunals asset reconstruction companies, settlement advisory committees, corporate debt restructuring mechanism, etc Enactment of SARFAESI Act was another important measure initiated by the government. Setting up of CIBIL for the purpose of sharing credit information and establishment of clearing corporation of India (CCIL) to act as central counter party for facilitating payments and settlements systems relating to fixed income securities and money market instruments were also supportives extended to banks. Certain supervisory measures were also initiated in the reform period. They were establishment of separate Board for Financial Supervision in RBI introduction of CAMELS supervisory rating system, recasting of the role of statutory auditors and increased internal control through strengthening of internal audit, strengthening of corporate governance etc. The technology related measures implemented were setting up of INFINET as the communication back bone for the financial sector introduction of negotiated dealing system for screen based trading in government securities and Real Time Gross Settlement System (RTGS).

Changes Galore:

Reforms have made significant impact on banks and their functioning. The following are the details of the banking transformation that took place as a result of impact of reforms:-

1. Risk based management: There are various types of risk such as interest rate risk, credit risk, liquidity risk, market risk, operational risk, etc. Banks have started to give attention to all types of risks in their risk management strategies. The RBI has also shifted its focus to risk based supervision. Banks have adopted comprehensive risk management systems. Risk management systems spells out internationally accepted methods of risk measurement for various types of risks to calculate capital charge required for meeting prescribed capital adequacy ratio. Banks have set up separate risk management departments charged with the task of risk management. Risk management involves many challenges. These challenges include compliance with risk adjusted capital and capital ratios, as a key regulatory and supervisory tool, ensuring risk assessment by line of business, product or even individual customer for making risk profile comprehensive adoption of risk adjusted return on capital and return on risk adjusted capital for efficient port-folio management arranging for adequate IT initiatives for enabling comprehensive MIS and better risk based decision – support, adoption and implementation of better and prudent ALM system that would conform to the dictums of risk based supervisory system.

2. Acute competition: In post-reform era, competition between banks is constantly on the increase. The market for bank services and products has now became a buyers’ market in respect of some products and services and the same will become a completely and universally buyers’ market in the years to come. Competition has become acute consequent on the birth of new generation private sector banks. Because of competition now there is need to lay greater focus on product innovation backed by IT advancement and thrust on customization process of such products. There is also need for greater focus on R&D initiatives and efforts. There is now increased focus on customer-orientation in all activities of banks. Because of competition banks are now giving greater attention to marketing of various products and services. Increase in competition may bring about further change in marketing strategy of banks, involving simulative analysis for clients, products and market segments with the help of sophisticated quantitative tools.

3. Change in Efficiency Parameters: In post-reform period, we find a complete change in efficiency parameters. To-day, what is important is strength of Balance Sheet. Return on assets, return on risk adjusted capital net interest margin, quality of assets, NPA percentage per employee business, per employee profit and overall per employee productivity proportion of low cost deposits are considered important to-day. Because of change in efficiency parameters there is now added emphasis on professionalism on the part of bank officers and staff and also on good corporate governance to increase customer satisfaction and enhance shareholder value. Banks will have to assume still tougher posture to recover NPAs and further reduce NPA percentage.

4. Universal Banking: As a result of reforms, the trend has been clearly towards universal banking. Now banks market credit cards, insurance products, mutual funds and even provide demat accounts and trading platform. There is no takers for narrow banking.

5. Mergers and Acquisitions: In post-reform era, we have seen many mergers and acquisitions. New Bank of India, a nationalized bank and Negungadi Bank Ltd were merged with Punjab National Bank. Kashinath Seth Bank was merged with SBI in 1995-96. Barelley Corp bank and South Gujarat Local Area Bank were merged with Bank of Baroda. Times Bank and Centurion Bank of Punjab have been merged with HDFC Bank. Bank of Madura, ICICI Ltd and Sangli Bank have been merged with ICICI Bank. Sikkim Bank was merged with Union Bank of India in 1999-2000. Global Trust Bank was merged with Oriental Bank of Commerce, United Western Bank was merged with IDBI Bank. Ganesh Bank of Kuruvalwad was merged with Federal Bank in 2006. Lord Krishna Bank and Bank of Muscat SAOG were merged with Centurion Bank of Punjab. Government of India encourages mergers as there is need for mergers to create larger and stronger banks and to bring about a new banking order. Mergers may be synergy-based mergers to derive economies of scale, market-driven mergers and mergers between banks and financial institutions including NBFCs in the interests of furthering universal banking. Mergers of public sector banks can also be done to create global banking institutions. Through the process of mergers, it is better to create 4 to 5 global banks, 10 to 15 national level players and remaining banks can be institutions, having regional character. We have seen even mergers of RRBs. State-wise and sponsor-bankwise mergers have brought about reduction in the number of RRBs from 196 to 98. Merger of South Gujarat Local Area Bank with Bank of Baroda has taken place in 2004.

Consolidation through mergers may take a back seat for the time being because of the present global crisis. For the present accent should be on consolidation of each bank in terms of its financial strength and volume of quality business and in terms of productivity and profitability enhancement of value for stake holders and overall Balance Sheet strength.

6. IT Initiatives: In post-reform era there have been significant IT initiatives. In every bank, there has been stress on increased IT application and efforts are on to absorb latest technology in respect of all branches for greater customer conveniences right sizing manpower better MIS and internal control improved risk management, better ALM etc. Banks are striving hard to expand CBS to all branches in a phased manner. Strategic alliance among banks in areas like, ATM sharing and funds transfer, etc have been new developments in post-reform era. Computerisation of all branches including rural branches establishment of rural ATMs etc are expected in the days to come.

7. Focus on Concerns: Another development in post-reform period has been a shift in focus from size related issues to concerns in respect of productivity, efficiency profitability return on capital net interest margin return on assets etc. In the days to come, there will be greater stress on these concerns. This will result in adoption of still better and more prudent risk management system, better and more effective management of spreads and net interest margin through cost cutting product innovation product-wise and business-line-wise cost, income and profitability analysis steps at augmentation of fee-based income etc.

8. Towards Partial Privatisation: Moving towards partial privatisation was a trend observed in port-reform period. Government stake in public sector bank stands reduced at 51 per cent from the original 100 per cent. It is possible that any new government coming to power in future may reduce stake to 33 per cent if there is adequate support for the same. When BIP led government was in power there was such a move, but the same was given up because of opposition from the left.

9. HRD Initiatives: In post-reform era there have been lot of human resource development initiatives. There is stress on objective manpower planning, adoption of scientific methods for evaluating the contributions of staff etc. Out-sourcing of certain items of work, is also a development in post-reform period. Fresh recruitment of staff including specialists is taking place in all banks. Performance linked reward system may also be implemented in public sector banks in the years ahead. Average age of staff in some public sector banks is high and this must be reduced by shedding of excessive inefficient staff aged beyond 50 and younger boys and girls with good educational background and IT skills must be recruited in their place. There should be special courses for preparing bankers for to-morrow. National Institute of Bank Management (NIBM) has launched a post graduate programme in banking. This is meant for preparing bank officers. NIBM alone cannot meet the requirements of such trained officers in all banks. Hence, all management institutes may also start suitably designed post graduate programmes for preparing bank officers for to-morrow. MBA (finance) candidates coming out from management institutes have to be given training by banks in job specific skills. If management institutes launch programmes on the lines of the programme launched by NIBM, banks can recruit them and straight away put them on the job. This will save lot of time taken in providing job – specific training in banks.

Increased strength: On account of banking reforms, Indian banks have become relatively much stronger vis-à-vis their counterparts in other Asian countries in terms of range of loan products and services, range of deposit products, capital adequacy ratio, quality of assets, profitability and productivity and overall balance sheet strength. But, the banking sector will have to encounter new challenges particularly in the context Basel II norms that are being implemented and the creation of global brands, anti-money laundering standards and entry of foreign and new players. Standard and poor’s analysis has shown that
Indian banking is ahead of China. Indonesia, Philippines and Vietnam. But, the banking sectors of Australia, New Zealand, Singapore, Hongkong, Japan, South Korea and Thailand are ahead of Indian banks. The study undertaken by Moody’s Investor Services has revealed that Indian banking is qualitatively better than its counterparts even in developed countries like, Japan, Singapore and Australia. Indian banks have posted the highest return on equity compared to their Asian counter parts during the last four years. There has been a distinctly discernible improvement in the performance of Indian banks on various fronts. But, the acquisition of a globally competitive size for Indian banks is a major challenge. Banks in other Asian countries, particularly in China are large in size compared to Indian banks. There will be a severe strain on capital on account of implementation of Basel II norms. The RBI has recently issued guidelines to banks on Pillar 2 of Basel II Framework. Pillar 2 deals with supervisory review process the objective of which is to ensure that banks have adequate capital to support all risks and also to encourage them to develop and use better risk management techniques for monitoring and managing their risks. The RBI guidelines listed some risks that banks are generally exposed to, but which are not fully captured in the regulatory Capital to Risk Asset Ratio (CRAR), such as interest rate risk, credit concentration risk, liquidity risk, settlement risk and reputational risk among others. The RBI has asked banks to develop an Internal Capital Adequacy Assessment Process (ICAAP) commensurate with their size, level of complexity, risk profile and scope of operations. This would be in addition to calculation of regulatory capital requirement under Pillar I. The implementation of new norms and guidelines involves a new challenge for banks.

Acquisition of competitive advantage: The vision for a strong vibrant and globally competitive banking sector in India is based on achievement of competitive advantage the acquisition of which is possible only through stress on efficiency increase in productivity and improvement in profitability, up-scaling of technological upgradation and continued improvement of overall balance sheet strength of banks. This would also require adoption of globally recognised best practices on the part of banks. Facing the challenge of change in terms of range of products, delivery channels, process, culture, structure and overall capabilities would require key structural changes such as consolidation full implementation of Basel II norms, implementation of real time gross settlement system at all branches, greater efficiency and higher productivity most effective risk management practices better credit management techniques to ensure improved credit quality good corporate governance better technology effective customer relationship management, focus on non-interest income improvement in human resource capabilities and increase in professionalism at all levels. Concentrated attention on these vital aspects can alone fetch competitive advantage.

Productivity: Business per employee of Indian banks increased from Rs.5-4 million in 1992 to Rs.16.3 million in 2004 and profit per employee rose from Rs.20,000/- to Rs.1,50,000/- in the same period. Also, business per branch increased from Rs.109.9 million to Rs.254.5 million in the above period. Measures of profitability i.e. return on assets and operating profit ratio and efficiency measures of net interest margin, operating profit to staff expense, operating cost ratio and staff expense ratio have to be improved. There is therefore need to increase business volumes by leveraging technology and down-sizing of staff strength to reduce cost of intermediation. All controllable costs must be reduced by banks.
Retail Banking: This must continue to be an area of focus. Core banking solution must be expanded by all banks to cover all of their branches. Measuring and managing risk across a range of diverse business activities through integrated risk management requires devising a comprehensive integrated risk management framework. This requires urgent attention by all banks.

Banks to-day find it difficult to maintain the minimum required controls expected of them in a new complex and increasingly regulated business environment. The traditional audit and inspection provide assurance that control systems are adequate and function satisfactorily. But, audit and inspections are in fact, a post-mortem and the findings emerging there-from are only after the transactions are over. Also audit and inspections may not cover all transactions and many may go un-noticed. They are rarely able to check all transactions in a detailed manner for controls compliance. Therefore, there is a risk of even frauds remaining undetected. To assist in the efficient capture and evaluation of data sophisticated software tools need to be used for evaluation of disclosure controls and procedures and internal controls and supervision over financial reporting.

Corporate Governance: corporate governance is of crucial importance for banks. The corporate governance philosophy of banks has to be based on the pursuit of sound business ethics and strong professionalism that aligns the interests of all stakeholders and the society at large. It is therefore necessary to constantly strengthen corporate governance mechanism in all banks.

Disclosure of reliable information facilitates market discipline, strengthens confidence and reduces the chances for rumours and creation of atmosphere of suspicion and misleading information that may bring about market instability. Indian accounting standards still lag behind global practices in many respects. This has to be addressed effectively at the earliest.

Innovative business Model: The introduction of innovative business models and financial technologies the world over has received an impetus through slashing operating cost through higher labour productivity innovation and business process re-engineering, further reduction of NPAs, micro planning, branch-centric profit planning, effective implementation of plans and monitoring of results CBS and market centric HRM policies and manpower planning. Very high average age of staff, requirement of new skills and talents, working in a computerised environment, foray into new and emerging areas require recruitment of new staff and specialists, extensive training etc. Although 86 per cent of PSBs are fully computerised only 44 per cent are actually functioning under CBS platform. Covering all branches in all banks under CBS will be a challenge for banks.

Increased customer-orientation and customer focus, product innovation, greater use of multiple channels like ATMs internet and mobile banking, etc efficient credit delivery besides building up sound financials are vital for banks for facing emerging challenges and obstacles.

Revamping of Human Resource Management: Staff in banks irrespective of their functional domain need to add value to acquire extra cutting edge. Human resources policies and Human resource management should be revamped so as to convert human resource management from a support function to a strategic partner to the banking business. This must happen in all banks. It is, therefore, necessary to develop a proper recruitment strategy and ensure that it dovetails with identified objectives of banks and helps attract and retain talent through flexible compensation packages and an institutional mechanism of recognition and reward.

Financial Inclusion: There are abundant opportunities for intermediation and mobilisation of savings and extension of bank credit at the bottom of the pyramid. About 60 to 70 per cent of enterprises and individuals do not have access to basic financial services such as savings and credit. Hence, increased financial inclusion of all those who presently stand excluded is of paramount importance. Bank linkage with SHGs, financing of SMEs, rural artisans, rural non-farm activities, etc will be great business opportunities for banks. Emphasis on volume-led growth to competitive balance sheet size, shift of focus from interest income to non-interest income and from capital adequacy to capital efficiency, etc are vital from the point of view of maintaining benchmarks of return on assets, return on owned funds, net NPAs, capital adequacy, cost to income ratio, net interest margin and intermediation cost. Micro finance is vital for accelerating financial inclusion.

Micro finance is now recognised as a key strategy for addressing issues of poverty alleviation and inclusive growth through more and more inclusiveness in credit allocation and disbursement. Banks may adopt appropriate linkage models of micro credit, particularly, micro credit model of SHGs.

Financial inclusion should not get reduced to the ritual of opening no-frills accounts at the rate of one account per household. It should become real and meaningful financial inclusion and the same should bring about empowerment of the financially included.

In bracing for to-morrow a paradigm shift in bank financing through innovative mechanism such as, templates for assessing customer risk and pricing products and services credit scoring, ensuring availability and use of information etc are absolutely essential. Retail banking requires product development and differentiation innovation and business process re-engineering micro-planning marketing prudent pricing customisation technology upgradation home, electronic and mobile banking cost-reduction and cross selling. All these must be given adequate attention. Banking success requires imaginative strategic planning organisational restructuring streamlining and revamping of human resources management, etc
Developing Immunity: Banks have to adopt and implement strategies to ensure immunity of their balance sheets from interest rate fluctuations by paying greater attention to non-interest income. Growing services sector and financial markets have created new avenues for fee based income. Merchant banking international trade, funds transfer, payment and settlements, consultancy services financial derivatives utility services etc opened up new income sources for banks. But, what is required is a total transition from branch banking to virtual banking, market segmentation to customer segmentation and product planning to customer-profitability and these are real challenges for banks. Many new challenges may also crop up in the years ahead.

An important issue that has cropped up from the U S financial crisis is the issue of conformity – Conformity to rules and time tested norms of lending and sound banking principles and best banking practices and the issue of development of professionalism in lending and investment.

Indian banks must draw appropriate lessons from the U S and global financial crisis. The financial crisis in the U S is the cumulative result of many questionable practices, adopted by banks over the years. Aggressive lending to those who were ineligible for credit and had no capacity to repay by way of sub-prime lending, securitisation of such loans by way of new products and derivatives and reckless investment in such derivatives by investment banks and other banks, failure of auditors to un-earth and report the failure in adhering to credit norms and defaults in repayment in time, failure of rating agencies to rate the newly innovated products correctly and assignment by them of excellent ratings to all such products, etc brought about a comprehensive failure of governance in banking and financial institutions in U S Banks in U S totally ignored accepted norms of lending and best banking practices. Banks in U S and Europe will have to go back to basics. Banking is dealing in others money and utmost care and professionalism must be shown in this business. Recently while addressing the north eastern states banking summit at New Delhi, the Finance Minister Sri P Chidambaram has stressed the need for banks to function as banks. He has thus stressed the importance of adhering to best banking practices and prudent lending norms. Indian Banks must draw suitable lessons from the global financial crisis that resulted in the collapse of giants such as Lehman Brothers. Banks in India must go by sound banking principles accepted lending standards and best banking practices. Professionalism in lending must be given primacy and it has to be ensured that there is no dilution in lending standards. In India, credit card defaults and defaults in personal loans may become problem areas in course of time if adequate care is not taken now. Utmost care must be taken while issuing cards and it must be ensured that credit cards are issued only to those who are eligible and who have capacity to honour their commitments under the credit card. Banks should also step up their level of disclosures on their credit cards personal loans, etc.

Areas of continued challenge: The areas of continued challenge for banks would be risk management, full implementation of Basel II norms, achievement of full and meaningful financial inclusion and availment of rural business opportunities and opportunities at the bottom of the pyramid, rural credit delivery system, enhancing customer satisfaction, technology upgradation on a continual basis, expansion of CBS platform to all branches including rural branches, further reduction of NPAs reducing intermediation cost increasing non-interest income and fee based income for improving profitability staff involvement in all bank functions, revamping of human resource management – increasing volumes of business despite competition from other banks and other dis-intermediation sources and participative and strategic planning.

As all the existing and future challenges have to be faced through staff banks have to give top priority to revamping of human resources management and development of human resources. Development of human resources through training, inducing participation and full involvement of all staff in bank functions and activities etc are very vital. Streamlining of audit and inspection, strict internal control and house-keeping, improved risk management, increasing capital efficiency and mobilisation of fresh equity from time to time, asset-liability management and balance sheet management are real challenges, requiring utmost attention.

Ensuring optimum performance: Developing concern for results and performance on the part of entire personnel in banks is a vital requirement. This too will be a challenge. Future of banks will depend on their alertness, operational and capital efficiency, customer orientation and standard of service creation of larger and larger volumes of performing assets, attainment of optimum levels of productivity profitability and overall performance. Future of banks hinges on these and also on their ability to build up large volumes of quality assets with lesser capital charge thereon that perform on an enduring basis. Ensuring optimum performance by each Manager, officer and staff will be crucial. Only those banks which are pro-active and which respond quickly to changing customer needs and changing environment and which give adequate attention to the above issues alone can successfully face the future challenges, perform well and grow as strong, vibrant, efficient and sound financial institutions.

Further reforms in banking sector may be necessary, may be a little later. The Committee headed by Raghurama Rajan former counsellor of IMF and Professor of Chickago Business School has submitted its report. This report contains lot of good reform ideas. India must examine this report and recommendations contained therein. We definitely require a new generation of reforms in the financial and banking sector and the same must be taken up once the situation improves.

Further, reforms are necessary to make the Indian financial system stronger and more resilient and also with a view to making the system a true partner in economic expansion and growth.